652 B.R. 644
Bankr. E.D. Pa.2023Background
- Debtor Scungio Borst & Associates, LLC was general contractor on a New Jersey renovation project for Scope FLP Pennington SM, LLC; Pennington owed the Debtor a Contract Balance of about $430,269.63.
- Debtor filed Chapter 11 on March 11, 2022 and served a Motion to Reject the Pennington contract on multiple subcontractors.
- Several subcontractors (Black Hawk; Elite Painting; K&D Ungarini Iron Works; M&D Door & Hardware; Network Flooring; SSC Distributors) recorded New Jersey construction liens post-petition against the Pennington property.
- Debtor and Pennington negotiated a Rule 9019 settlement: Pennington would deposit the Contract Balance into a segregated DIP escrow; the Debtor then moved to avoid the subcontractor liens as void ab initio as automatic-stay violations.
- Debtor and the Official Committee sought compensatory damages under 11 U.S.C. § 362(k)(1) for attorneys’ fees and costs incurred to remove the liens.
- Court held the liens violated § 362(a)(4), were willful, and awarded compensatory damages jointly and severally against the subcontractors: $14,488.86 to the Debtor and $12,112.00 to the Official Committee.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether recording subcontractor liens under NJ law violated the automatic stay (§362(a)(4)) | Debtor: Liens functionally created/perfected a lien on the debtor’s accounts receivable and thus targeted estate property | Subcontractors: Liens were recorded against real property (Pennington) and not against debtor’s estate property | Held: Recording the liens effectively attached to the debtor’s receivable and violated §362(a)(4) (Third Circuit precedent governs) |
| Whether the lien filings were "willful" for §362(k)(1) | Debtor: Liens were recorded after notice of bankruptcy/Motion to Reject — knowledge makes the act willful | Subcontractors: Some argued lack of knowledge or good-faith belief in right to file | Held: Willful — filing occurred after receiving notice; good-faith legal error does not negate willfulness |
| Whether the Debtor suffered actual injury recoverable under §362(k)(1) (attorneys’ fees and costs) | Debtor: Legal fees/costs incurred to remove liens and obtain Contract Balance are actual damages | Subcontractors: Argued liens were on non-debtor property so injury insufficient or fees not caused by their conduct | Held: Fees and costs were reasonable, necessary, and proximately caused by the stay violations — recoverable as actual damages |
| Whether the Official Committee may recover attorneys’ fees under §362(k)(1) | Official Committee: As the creditors’ representative it was injured (incurred fees to protect creditor recovery) and may recover as an “individual” | Subcontractors: Argued no statutory basis to award committee damages | Held: Committee may recover; Third Circuit precedent interprets "individual" broadly and recovery of committee’s fees is consistent with stay’s purposes and §1103/§330 administrative framework |
Key Cases Cited
- In re Linear Elec. Co., Inc., 852 F.3d 313 (3d Cir.) (subcontractor liens can attach to debtor-contractor’s accounts receivable, triggering §362(a)(4))
- California Coast Univ. v. Aleckna, 13 F.4th 337 (3d Cir.) (attorneys’ fees constitute financial injury recoverable as actual damages)
- Cuffee v. Atl. Bus. & Cmty. Dev. Corp., 901 F.2d 325 (3d Cir.) (broad interpretation of “individual” under §362 to include corporate debtors)
- In re Lansaw, 853 F.3d 657 (3d Cir.) (knowledge of bankruptcy establishes willfulness)
- Budget Serv. Co. v. Better Homes of Va., 804 F.2d 289 (4th Cir.) (reasoning that corporate debtors qualify as “individuals” for stay-remedy purposes)